Did Goldman sell its soul for measly $1B?

By Colin Barr, senior writerApril 19, 2010: 3:19 PM ET

(Fortune) -- Goldman Sachs has to be asking itself if it was all worth it.

The Wall Street powerhouse made just $1.02 billion in fees by selling collateralized debt obligations -- the complex debt structures at the center of a fraud case that now threatens to
undermine the bank's immensely valuable reputation -- between 2000 and 2008, according to a note out Monday from ThomsonReuters.

A billion dollars isn't much money to the big Wall Street firm. Goldman made $12 billion last year and is scheduled to disclose Tuesday morning how many additional billions it raked in
during the just-completed first quarter.

While those fees no doubt padded the bank's profits and the wallets of many individual bankers, they account for just 13% of the money Goldman made underwriting debt securities over that
period.

By contrast, Goldman (GS, Fortune 500) lost $12 billion of its market value after the Securities and
Exchange Commission announced its civil suit against the firm and one of its vice presidents Friday. The stock was flat in late afternoon trading Monday.

The SEC alleges the firm defrauded investors in a CDO by failing to disclose that a hedge fund that was betting against the investment was helping to select the bonds tied to the CDO.
Investors ended up losing $1 billion -- and the hedge fund, run by John Paulson, walked away with the identical amount.

To say that the firm denies wrongdoing would be a major understatement. Goldman has now put out three statements sketching out its defense to the charges.

"Based on all that we have learned, we believe that the firm's actions were entirely appropriate, and will take all steps necessary to defend the firm and its reputation by making the
true facts known," Goldman said in a statement Monday.

Indeed, Goldman is feeling so righteous about its actions that it took a detour from defending itself in its latest statement to defend the CDO market itself.

"The SEC complaint is related to a single transaction in 2007 and involves a highly particularized set of alleged facts," Goldman asserts. "It would not appear to have broad ramifications
for the CDO market generally."

This is an interesting claim, given that the CDO market collapsed at the end of 2007 when it became clear that the triple-A securities sold to CDO buyers weren't worth the paper they were
printed on. CDO issuance fell to $4.3 billion last year from more than 100 times that amount in both 2006 and 2007.

What's more, skeptics are predicting lawyers will beat a path to Wall Street regardless of what Goldman and the other derivatives dealers say. "A trillion dollars or more of CDOs could
face similar litigation," wrote University of San Diego law and finance professor Frank Partnoy in the Financial Times Monday.

Goldman wasn't the biggest CDO underwriter, but it was a major player. The firm was the No. 11 underwriter of CDOs in 2006 and the No. 6 underwriter in 2007, ThomsonReuters said.

Other top underwriters over that period include the likes of Merrill Lynch (now owned by Bank of America (BAC, Fortune 500)), Citigroup (C, Fortune 500), Credit Suisse (CS), Bear Stearns (now part of JPMorgan Chase (JPM, Fortune 500)) and Wachovia (acquired last year by Wells Fargo (WFC, Fortune 500)).

And Goldman was looking to build on its gains, presumably for reasons ranging from bragging rights to a desire to hedge itself against the approaching subprime meltdown.

A 2007 memo to the firm's mortgage capital committee advocated deals such as the one the SEC sued the firm over, saying it "helps position Goldman to compete more aggressively in the
growing market for synthetics written on structured products."

As it turned out, that market melted down altogether rather than growing, as investors caught on to the fact that the triple-A securities they'd been sold weren't safe.

But nowadays, what is? Certainly not Goldman's once pristine reputation.